Reverse Mortgages Are Tempting But Costly

Posted by Frank

April 20, 2008

Homeowners – especially those creeping closer to retirement – may find that the majority of their savings is in their homes equity. Arguably, this is not the ideal way to prepare for life after work, but to those who rely on their homes equity now, find themselves with multiple ways to spend that equity without selling their residence. Reverse Mortgages are quickly becoming a popular choice for those over 62, but with high costs and certain restrictions, should be carefully studied before signing on the dotted line.

What Is a Reverse Mortgage?
A reverse mortgage is exactly what it sounds like, instead of the homeowner paying the lender for a mortgage, the bank pays the borrower via the homes equity. Reverse mortgages are similar to a basic home equity loan, only with a reverse mortgage the homeowner is not required to pay back the loan until they no longer use the home as their primary residence or they pass away. The loans are only available to those over the age of 62 and often times provide great ways for retirees, who find themselves in a financial pinch, to borrow against their home’s equity without being setback each month with a new payment. Often times, reverse mortgages are paid back when an older person can no longer live by themselves and consequently sell their home and move into assisted living. When the sale occurs, the bank is paid back for the loan when the house’s equity is actually realized.

What Makes Reverse Mortgages So Tempting
• The most obvious advantage to a reverse mortgage is spending your homes equity without paying back the loan until your house is sold.
• Because the equity in your home is your money, when you directly tap into it, you are not taxed.
• It will not affect your eligibility for Medicare of Social Security.
• There are no restrictions as to what you can spend the loan on.

The Major Drawbacks of a Reverse Mortgage (Costs)

• You can expect to pay around 2% of your homes total value to obtain the loan.
• Upfront fees, which can account to an additional 2% of the value of your home, will also be applied to your loan.
• You will be required to pay mortgage insurance over the term of the loan.
• In total, you can be face with fees nearing 4.5% of your home’s value just to obtain a slice of your home’s equity. This is a significant number, consider the following: if a home is worth $300,000 and a homeowner wants to take out a reverse mortgage worth $50,000 the total fees could cost $13,500, which represents roughly 27% of the total reverse mortgage devoted entirely to fees.

Although reverse mortgages are great ways for many older borrowers to obtain money when they need it the most, they should be considered carefully. The costs associate with these loans can easily outweigh the benefits to obtaining the equity – especially when the total amount of the reverse mortgage represents a small percentage of a homes value. As reverse mortgages increase in popularity, so too will the competition, which will lower the overall costs, but until then, always research all of your borrowing options before agreeing to reverse mortgage. Pherhaps for many, a more conventional borrowing method may be appropriate. $

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Comments

Comment by Sam Jones on April 22, 2008 @ 9:11 am

I’ve been working in this field for over 3 years. Your figures need to be check. A homeowner with a home value at 300K will net (after fees) closer to 225K. Where you got a figure of 50K is false. You should do your homework and your figures will be much different.

Do your homework before you come across so sure of yourself. BTW: did you sit down wilth an loan officer and test your numbers?

Comment by Frank on April 22, 2008 @ 9:51 am

@ Sam - Thanks for posting. The $50,000 would be the amount of equity they are taking out of their home in a loan. In other words, if they do not want to take out a loan for the entire equity in their home, just the 50k. Am I correct in assuming you don’t have to take out a loan for the entire amount of equity you own?

Also, if somebody does as you say and takes out their equity of 300k and nets 225k after fees, they are still paying 25% or $75,000 in fees. Thats like giving 25% of your home’s equity back to the bank.